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Europe’s Negative Nellies: Turning Positive?

By

Matt Phillips

Sep 19, 2012 2:57 pm ET

FactSet

You know Europe’s negative Nellies, right? Well, maybe not. It was only in the last 15 minutes that we gave that nickname to the sovereign debt of Germany, Denmark, Finland, Switzerland, the Netherlands and Austria. As diehard MarketBeaters know, yields on bonds issued by those countries dipped into negative territory in recent months, as concerns about the European sovereign debt crisis hit a fever pitch.

As a refresher, negative yields on bonds essentially mean that investors are agreeing to take a loss on their investments. If they hold the bonds to maturity, they will receive slightly less back than they invested. Why would anybody agree to such a bad deal? Because they’re scared. Think of negative yields as a kind of insurance. People are willing to pay a little bit to protect themselves from losses elsewhere that could be a lot worse. The bonds issued by these countries are the closest thing to “safe” in the European market.

Anyhow, as the chart on the right shows you, since falling into negative territory in July and August, two-year yields of most all of these countries are now back in positive territory, if only barely. Only yields on Swiss two-years remain below zero, although the yields have been moving higher, out of deeply negative territory.

In part, that reflects the fact that the investors seem to be willing to start selling Swiss franc-denominated investments. As Matt Walters reported in the Journal recently, that’s also a symptom of short-term relief over Europe.